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The Dodd-Frank Wall Street Reform and Consumer Protection Act directed GAO to conduct a one-time audit of the emergency loan programs and other assistance authorized by the Board of Governors of the Federal Reserve System (Federal Reserve Board) during the recent financial crisis. This report examines the emergency actions taken by the Federal Reserve Board from December 1, 2007, through July 21, 2010. For each of these actions, where relevant, GAO's objectives included a review of (1) the basis and purpose for its authorization, as well as accounting and financial reporting internal controls; (2) the use, selection, and payment of vendors; (3) management of conflicts of interest; (4) policies in place to secure loan repayment; and (5) the treatment of program participants. To meet these objectives, GAO reviewed program documentation, analyzed program data, and interviewed officials from the Federal Reserve Board and Reserve Banks (Federal Reserve System).

On numerous occasions in 2008 and 2009, the Federal Reserve Board invoked emergency authority under the Federal Reserve Act of 1913 to authorize new broad-based programs and financial assistance to individual institutions to stabilize financial markets. Loans outstanding for the emergency programs peaked at more than $1 trillion in late 2008. The Federal Reserve Board directed the Federal Reserve Bank of New York (FRBNY) to implement most of these emergency actions. In a few cases, the Federal Reserve Board authorized a Reserve Bank to lend to a limited liability corporation (LLC) to finance the purchase of assets from a single institution. In 2009 and 2010, FRBNY also executed large-scale purchases of agency mortgage-backed securities to support the housing market. The Reserve Banks' and LLCs' financial statements, which include the emergency programs' accounts and activities, and their related financial reporting internal controls, are audited annually by an independent auditing firm. These independent financial statement audits, as well as other audits and reviews conducted by the Federal Reserve Board, its Inspector General, and the Reserve Banks' internal audit function, did not report any significant accounting or financial reporting internal control issues concerning the emergency programs. The Reserve Banks, primarily FRBNY, awarded 103 contracts worth $659.4 million from 2008 through 2010 to help carry out their emergency activities. A few contracts accounted for most of the spending on vendor services. For a significant portion of the fees, program recipients reimbursed the Reserve Banks or the fees were paid from program income. The Reserve Banks relied more extensively on vendors for programs that assisted a single institution than for broad-based programs. Most of the contracts, including 8 of the 10 highest-value contracts, were awarded noncompetitively, primarily due to exigent circumstances. These contract awards were consistent with FRBNY's acquisition policies, but the policies could be improved by providing additional guidance on the use of competition exceptions, such as seeking as much competition as practicable and limiting the duration of noncompetitive contracts to the exigency period. To better ensure that Reserve Banks do not miss opportunities to obtain competition and receive the most favorable terms for services acquired, GAO recommends that they revise their acquisition policies to provide such guidance. FRBNY took steps to manage conflicts of interest for its employees, directors, and program vendors, but opportunities exist to strengthen its conflict policies. In particular, FRBNY expanded its guidance and monitoring for employee conflicts, but new roles assumed by FRBNY and its employees during the crisis gave rise to potential conflicts that were not specifically addressed in the Code of Conduct or other FRBNY policies. For example, FRBNY's existing restrictions on its employees' financial interests did not specifically prohibit investments in certain nonbank institutions that received emergency assistance. To manage potential conflicts related to employees' holdings of such investments, FRBNY relied on provisions in its code that incorporate requirements of a federal criminal conflict of interest statute and its regulations. GAO makes seven recommendations to the Federal Reserve Board to strengthen policies for managing noncompetitive vendor selections, conflicts of interest, risks related to emergency lending, and documentation of emergency program decisions. The Federal Reserve Board agreed that GAO's recommendations would benefit its response to future crises and agreed to strongly consider how best to respond to them.

Recommendations for Executive Action

Status: Closed - Implemented

Comments: The Federal Reserve Board has revised the formal acquisition policy for Federal Reserve Banks to provide additional guidance on the steps staff should follow in exigent circumstances. The guidelines addressed several items, including the need for Reserve Banks to take appropriate steps within the time available to evaluate the Bank?s options for sourcing the required goods, services, software, or construction, the duration of such contracts, the circumstances under which such contracts can be continued, and the need to document justification for using procedures other than those for competitive proposals and any efforts it made to promote competition in the acquisition process. The revised "Model for Acquisition Guidelines for Federal Reserve Banks" were approved by the Conference of First Vice Presidents in June 2013.

Recommendation: While creating control systems at the same time that the emergency programs were being designed and implemented posed unique challenges, the recent crisis provided invaluable experience that the Federal Reserve System can apply in the future should the use of these authorities again become warranted. Going forward, to further strengthen policies for selecting vendors, ensuring the transparency and consistency of decision making involving the implementation of any future emergency programs, and managing risks related to these programs, the Chairman of the Federal Reserve Board should direct Federal Reserve Board and Reserve Bank staff to revise Reserve Banks' formal acquisition policies and procedures to provide additional guidance on the steps staff should follow in exigent circumstances, specifically to address soliciting as much competition as possible, limiting the duration of noncompetitive contracts to the period of the exigency, and documenting efforts to promote competition.

Agency Affected: Federal Reserve System: Board of Governors

Status: Closed - Implemented

Comments: In July 2011, the Federal Reserve revised its policies regarding stock ownership by Federal Reserve Bank directors and by Federal Reserve System staff to reflect the Federal Reserve's expanded supervisory authority under the Dodd-Frank Act. For example, Federal Reserve System employees -- other than those involved in banking supervision and regulation -- may not own stock in most savings and loan holding companies, and those involved in banking supervision and regulation may not own stock in any savings and loan holding companies. In addition, Federal Reserve Board staff noted that Reserve Bank employees receive regular training on the Reserve Bank Code of Conduct and federal conflicts of interest statutes, and supervision employees' assignments are screened through a conflicts of interest database to help ensure that appropriate recusals are in place.

Recommendation: While creating control systems at the same time that the emergency programs were being designed and implemented posed unique challenges, the recent crisis provided invaluable experience that the Federal Reserve System can apply in the future should the use of these authorities again become warranted. Going forward, to further strengthen policies for selecting vendors, ensuring the transparency and consistency of decision making involving the implementation of any future emergency programs, and managing risks related to these programs, the Chairman of the Federal Reserve Board should direct Federal Reserve Board and Reserve Bank staff, as part of the Federal Reserve System's planned review of the Reserve Banks' codes of conduct given their expanded statutory authority under the Dodd-Frank Act, to consider how Reserve Banks' experience managing employee conflicts of interest, including those related to certain nonbank institutions that participated in the emergency programs, could inform the need for changes to the Reserve Banks' conflict policies.

Agency Affected: Federal Reserve System: Board of Governors

Status: Closed - Implemented

Comments: The Federal Reserve Bank of New York has revised its Acquisition Policy, which became effective August 5, 2013. The revised policy corrected some deficiencies noted in the acquisition policy that was in place during the financial crisis. The 2013 acquisition policy broadened guidance on acquisitions during exigent circumstances, such as including a duration limit for the contract and recommending that contracts include a provision that allows for termination for convenience to allow for re-evaluation of the contract after the exigent circumstances have subsided.

Recommendation: While creating control systems at the same time that the emergency programs were being designed and implemented posed unique challenges, the recent crisis provided invaluable experience that the Federal Reserve System can apply in the future should the use of these authorities again become warranted. Going forward, to further strengthen policies for selecting vendors, ensuring the transparency and consistency of decision making involving the implementation of any future emergency programs, and managing risks related to these programs, the Chairman of the Federal Reserve Board should direct Federal Reserve Board and Reserve Bank staff to finalize a comprehensive policy for FRBNY's management of risks related to vendor conflicts of interest that formalizes FRBNY practices and lessons learned from the crisis. This policy could include guidance on when to include contract protections that were not always found in FRBNY's vendor contracts, such as requirements for higherrisk vendor firms to provide a written conflict remediation plan and certify compliance with this plan.

Agency Affected: Federal Reserve System: Board of Governors

Status: Open

Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

Recommendation: While creating control systems at the same time that the emergency programs were being designed and implemented posed unique challenges, the recent crisis provided invaluable experience that the Federal Reserve System can apply in the future should the use of these authorities again become warranted. Going forward, to further strengthen policies for selecting vendors, ensuring the transparency and consistency of decision making involving the implementation of any future emergency programs, and managing risks related to these programs, the Chairman of the Federal Reserve Board should direct Federal Reserve Board and Reserve Bank staff to strengthen procedures in place to guide Reserve Banks' efforts to manage emergency program access for higher-risk borrowers by providing more specific guidance on how Reserve Bank staff should exercise discretion and document decisions to restrict or deny program access for depository institutions and primary dealers that would otherwise be eligible for emergency assistance.

Agency Affected: Federal Reserve System: Board of Governors

Status: Open

Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

Recommendation: While creating control systems at the same time that the emergency programs were being designed and implemented posed unique challenges, the recent crisis provided invaluable experience that the Federal Reserve System can apply in the future should the use of these authorities again become warranted. Going forward, to further strengthen policies for selecting vendors, ensuring the transparency and consistency of decision making involving the implementation of any future emergency programs, and managing risks related to these programs, the Chairman of the Federal Reserve Board should direct Federal Reserve Board and Reserve Bank staff to document a plan for estimating and tracking losses that could occur under more adverse economic conditions within and across all emergency lending activities and for using this information to inform policy decisions, such as decisions to limit risk exposures through program design or restrictions applied to eligible borrowing institutions.

Agency Affected: Federal Reserve System: Board of Governors

Status: Open

Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

Recommendation: While creating control systems at the same time that the emergency programs were being designed and implemented posed unique challenges, the recent crisis provided invaluable experience that the Federal Reserve System can apply in the future should the use of these authorities again become warranted. Going forward, to further strengthen policies for selecting vendors, ensuring the transparency and consistency of decision making involving the implementation of any future emergency programs, and managing risks related to these programs, the Chairman of the Federal Reserve Board should direct Federal Reserve Board and Reserve Bank staff, in drafting regulations to establish the policies and procedures governing emergency lending under section 13(3) of the Federal Reserve Act, to set forth the Federal Reserve Board's process for documenting, to the extent not otherwise required by law, its justification for each use of this authority.

Agency Affected: Federal Reserve System: Board of Governors

Status: Open

Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

Recommendation: While creating control systems at the same time that the emergency programs were being designed and implemented posed unique challenges, the recent crisis provided invaluable experience that the Federal Reserve System can apply in the future should the use of these authorities again become warranted. Going forward, to further strengthen policies for selecting vendors, ensuring the transparency and consistency of decision making involving the implementation of any future emergency programs, and managing risks related to these programs, the Chairman of the Federal Reserve Board should direct Federal Reserve Board and Reserve Bank staff to document the Federal Reserve Board's guidance to Reserve Banks on types of emergency program decisions and risk events that require approval by or consultation with the Board of Governors, the Federal Open Market Committee, or other designated groups or officials at the Federal Reserve Board.